Morgan Stanley analyst Katy Huberty issued a note to clients about it after a meeting with Apple Chief Financial Officer Peter Oppenheimer, Business Insider reported.

"We ... see several signs that a lower-priced iPhone makes sense," Huberty said. "1) iPad mini is expanding Apple's customer base with 50% of purchases in China/Brazil representing new customers to the ecosystem. 2) Chinese consumers show a desire to purchase the latest version of iPhone (instead of discounted older generations.) 3) iPhone 4 demand surprised to the upside in the December quarter. Even at a low 40% gross margin and 1/3 cannibalization rate, we see an 'iPhone Mini' as incremental to revenue and gross profit dollars."

Two years ago this month, Apple CEO Tim Cook (who was then the chief operating officer) told Bernstein Research analyst Toni Sacconaghi that the company was doing "clever things" to attack the prepaid market, Business Insider said. He told her he wanted Apple to be "for everyone," not "just for the rich." Cook also said "price is big factor in the prepaid market," but that the company is not "ceding any market," noting how China is "a classic prepaid market."

These analyst notes align well with recent rumors about Apple having a cheaper iPhone in development. In January, a slew of reports from supply-chain sources and major U.S. news outlets such as Bloomberg Businessweek and the Wall Street Journal took notice of a new iPhone in development that strategically targets lower-income, emerging markets such as China and India.

Why Apple Should Release The Low-Cost iPhone In 2013

Apple’s earnings for the fiscal first quarter ended Dec. 29 -- despite breaking all previous quarterly profit records at the company -- were insufficient to assuage analysts' and investors' concerns about the future, and its diminishing share price has been a reflection of that. To reverse its sliding share price, Apple needs to prove it can still expand. Releasing a comparatively low-priced iPhone 6 this year might be the key.

“One of our sources claims that Apple’s iPhone prices remain too high for most mainland Chinese customers -- the iPhone 5 hardware alone starts at $849 there, versus the iPhone 4 at $500, in a country where the average annual salary is around $3,000 per person,” iLounge editor-in-chief Jeremy Horwitz wrote in a January report. “The source has said that mainland Chinese iPhone 5 sales are already tapering off as a result of the pricing, which is higher than in Hong Kong. A budget iPhone model would help sales in populous but underdeveloped countries to grow.”

Thanks to cheaper, smaller, and more power-efficient chipsets, Apple can afford to build an entry-level to midrange smartphone on top of its current iPhone -- either one that's larger, like the Samsung Galaxy S3, or a smaller iPhone Nano -- to appeal to consumers who can’t quite afford Apple’s most popular product, including many in China. Furthermore, if Apple’s iPhone 6 was not only cheaper but also smaller, the phone would greatly appeal to Asian consumers who find small devices both chic and easier to hold in their (smaller) hands.

Apple definitely wants to make inroads in China. The company is reportedly trying to strike a deal in 2013 with China Mobile Ltd. (NYSE:CHL), the largest telecommunications carrier in the world with 703 million active subscribers, to build a TD-LTE version of the iPhone to work on the carrier’s high-speed networks. On Jan. 10, Apple CEO Tim Cook stopped by China Mobile headquarters to meet with Xi Guohua, that company’s chairman, to discuss “matters of cooperation.”

Reports of Apple's desire to build multiple iPhone models have been echoed on Wall Street. On Jan. 2, Topeka Capital Markets analyst Brian White said the company will likely release its next iPhone in more colors and screen sizes, implying that Apple might sell an iPhone that's smaller or larger than the current iPhone 5 or even the previous-generation iPhone 4S or 4 units.

"Although Apple offers a 4-inch screen on the iPhone 5 and a 3.5-inch screen on the iPhone 4S and iPhone 4, the company has never offered multiple screen sizes for a single model," White said. "We believe this is about to change with the next iPhone offering different screen sizes that we believe will allow Apple to better bifurcate the market and expand its reach."

Considering Apple’s urgency to strike a deal with China Mobile, as well as the growing number of rumors pointing to a 2013 release date for an iPhone 6 that would be compatible with the popular carrier, it’s likely we could see Apple release both the iPhone 5S and iPhone 6 this year.

iPhone 6: What Might It Look Like?

Horwitz, the editor-in-chief at iLounge, detailed last month what he called the "budget iPhone 5," which will allegedly look like the iPhone 5, but feature several new design elements and tweaks.

“Yes, it will be made substantially from plastic,” Horwitz wrote, echoing an earlier DigiTimes report that said the iPhone 5S or 6 would feature a hybrid chassis made of both plastic and metal. “No, it won’t just be a Retina- and Lightning-equipped refresh of the iPhone 3G or 3GS, Apple’s last plastic iPhones, nor will it look just like an all-plastic version of the iPhone 5. This new model is actually a cross between the iPhone 5, the fifth-generation iPod touch, and -- wait for it -- the iPod classic. Yes, really. It will have a 4” screen, like the iPhone 5, a bottom like the latest iPod touch and a shape that’s most similar to the iPod classic.”

The original DigiTimes report about the low-cost iPhone 6 said the new iPhone’s internal parts could “be seen from the outside through a special design." If this rumor is accurate, the finished design for the iPhone 6 might look like an iPhone 5 mixed with the plastic enclosure of the iPhone 3GS from 2009 mixed with the final design for the Bondi blue iMac in 1998, which was characterized by its brightly colored, translucent plastic casing, letting users see the innards of their desktop computers for the first time.

Horwitz believes the low-cost iPhone 6 will feature specifications nearly identical to those of the iPhone 5, but will be "a half-millimeter taller and a half-millimeter wider," as well as a full millimeter thicker. While these changes are minimal, Horwitz noted the biggest design change in the iPhone 6 will be the curves.

“Apple’s budget housing looks closest to the iPod classic in shape, though not in materials,” Horwitz said. “Unlike the plastic iPhone 3G/3GS, which featured soft curves on all sides, the budget iPhone’s curves start and end at flat surfaces, so each side and the back are flat. This seems like a trivial change, until you realize that it allows Apple to use flat rather than curve-matched parts: the right side has a flat, centered SIM card tray just like the iPhone 5’s, while all of the buttons and ports are on flat rather than curved surfaces. A flat-backed iPhone won’t rock on a flat surface when it vibrates, either.”

The proportions of the iPhone 6 will resemble those of the latest-generation iPod touch, with similar locations for the camera, microphone, and rear flash, according to Horwitz. The bottom microphone, headphone jack, Lightning dock, and speaker are in the same locations as in the iPhone 5, but the new iPhone 6 is said to have an extra microphone on the bottom, as well as four individual holes for the speaker grill, rather than the 26 speaker holes at the bottom of the iPhone 5.

“In summary, the budget iPhone will look a lot like an iPhone 5 from the front, an iPod classic from the side, and an iPod touch 5G on the bottom -- only made from plastic rather than glass or metal,” Horwitz concluded. “It won’t make any bold departures from past Apple designs, but then, it’s supposed to be an inexpensive iPhone and achieves that goal pretty much as expected.”

Besides the form factor, Horwitz believes the next iPhone will feature a processor bump -- possibly an Apple-built A7 chip -- as well as improvements to the camera and flash, integrating a new aperture and 13-megapixel lens.

However, most rumors about the iPhone 6 have revolved around the screen, as Apple is reportedly investing a great deal of time, energy, and capital on the display for its next-gen iPhone 5S and iPhone 6.

A Jan. 3 report by the China Times said Apple might switch to a "Touch On Display" panel currently in development at one of the company's suppliers, Taiwan-based Innolux Corp. (TPE:3481), which has reportedly licensed Sharp's proprietary IGZO display technology.

Whether or not Apple specifically chooses Innolux to make screens for the next iPhone, however, the company will most likely feature Sharp's ultrathin IGZO display technology in its next iPhone -- the iPhone 5S, iPhone 6, or both.

In late December, Asymco analyst Horace Dediu and DigiTimes both mentioned Apple’s alleged investment in the ultrathin IGZO displays produced by Sharp, predicting the inclusion of the technology in Apple’s next batch of iOS devices, including iPhones and iPads. Dediu also pointed to Apple’s recent $2.3 billion investment in “product tooling, manufacturing process equipment, and infrastructure,” believing the cash was used to help bail out Sharp, which had been in financial straits last year. Sharp is reportedly going “all in” on IGZO technology, so it’s possible Apple saved Sharp to leverage its investment in the next generation of displays.

As noted by Tom's Hardware, the IGZO display is not only thin and tough, but also can handle even higher screen densities than Apple’s Retina display, which is visually stunning on its own. IGZO displays can reportedly handle display densities north of 330 ppi: In comparison, the new iPad 4 can only achieve 264 ppi.

One of the advantages of IGZO display technology is its lower power consumption. Most Apple products, from the iPhone 5 to the iPad 4, require cartoonishly big batteries to achieve just eight hours of power -- this is because current-gen Retina displays are extremely power-hungry. If Apple wanted its iPhone 6 not only to last longer during the day but also to charge faster when plugged in, IGZO seems to be the way to go for the next generation of iOS devices.

Giving credence to these rumors, Taiwan-based AU Optronics Corp. (NYSE:AUO), reportedly plans to develop a Retina display for the next-generation iPad mini, which may require IGZO technology to make such a Retina display feasible.

Apple is facing stiffening competition from its rivals at Samsung Electronics Co. Ltd. (KRX:005935), Google Inc. (NASDAQ:GOOG), and even the Microsoft Corp. (NASDAQ:MSFT), so the Cupertino, Calif.-based company will need to pull out all the stops for its iPhone 5 successor, as well as for the low-cost iPhone 6, as it seeks to keep customer interest in an increasingly crowded marketplace.

And it has set bar high: Apple sold 47.8 million iPhones and 22.9 million iPads in the company's fiscal first quarter ended Dec. 29.